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The Bank of Canada today increased its target for the overnight rate to 3¼%, with the Bank Rate at 3½% and the deposit rate at 3¼%. The Bank is also continuing its policy of quantitative tightening.

The global and Canadian economies are evolving broadly in line with the Bank’s July projection. The effects of COVID-19 outbreaks, ongoing supply disruptions, and the war in Ukraine continue to dampen growth and boost prices.

Global inflation remains high and measures of core inflation are moving up in most countries. In response, central banks around the world continue to tighten monetary policy. Economic activity in the United States has moderated, although the US labour market remains tight. China is facing ongoing challenges from COVID shutdowns. Commodity prices have been volatile: oil, wheat and lumber prices have moderated while natural gas prices have risen.

In Canada, CPI inflation eased in July to 7.6% from 8.1% because of a drop in gasoline prices.  However, inflation excluding gasoline increased and data indicate a further broadening of price pressures, particularly in services. The Bank’s core measures of inflation continued to move up, ranging from 5% to 5.5% in July. Surveys suggest that short-term inflation expectations remain high. The longer this continues, the greater the risk that elevated inflation becomes entrenched.

The Canadian economy continues to operate in excess demand and labour markets remain tight. Canada’s GDP grew by 3.3% in the second quarter. While this was somewhat weaker than the Bank had projected, indicators of domestic demand were very strong – consumption grew by about 9½% and business investment was up by close to 12%. With higher mortgage rates, the housing market is pulling back as anticipated, following unsustainable growth during the pandemic. The Bank continues to expect the economy to moderate in the second half of this year, as global demand weakens and tighter monetary policy here in Canada begins to bring demand more in line with supply.

Given the outlook for inflation, the Governing Council still judges that the policy interest rate will need to rise further. Quantitative tightening is complementing increases in the policy rate. As the effects of tighter monetary policy work through the economy, we will be assessing how much higher interest rates need to go to return inflation to target. The Governing Council remains resolute in its commitment to price stability and will continue to take action as required to achieve the 2% inflation target.

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By now, “trigger points” should be in the vocabulary of nearly every variable rate mortgage holder.

There’s been a great deal of coverage lately about trigger points due to the rise in interest rates so far this year.

Put simply, it’s the point where variable-rate mortgage borrowers with fixed mortgage payments are no longer paying down the principal, as 100% of their payment is going towards interest.

In most cases, the lender will reach out to affected borrowers to arrange an increase in their monthly payments.

And in the meantime, as rates have been rising, so too have amortization periods for borrowers with variable rate mortgages with fixed payments, since the mortgage balance is being paid down at an increasingly slower pace. That is, until renewal time, when the mortgage may renew at a higher rate with higher payments to bring the mortgage amortization back to the maximum number of years permitted.

The benefits of making mortgage prepayments

Rather than waiting for your mortgage to renew, impacted borrowers can take pre-emptive action and increase their mortgage payments in advance to soften the impact at renewal time.

If you’ve currently got a variable-rate mortgage with fixed regular payments, consider reaching out so we can review your options available.

Just as compounding interest can work wonders for growing savings, making additional payments to your mortgage–which always go directly towards paying down the outstanding balance–can have a surprising long-term impact and potentially shave years off your amortization.

Even if you have a fixed-rate mortgage, it’s an option that should also be considered to help mitigate any higher payments at renewal time.

If you’d like to know more about the benefits of making prepayments or increasing your monthly payment amount–and if it’s the right decision for you–please don’t hesitate to let us know. We’d be happy to connect you with Julie Isaacs, a trusted Mortgage Broker that we refer our clients to.

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